11. Income Taxes

At December 31, 2014, the Company had deferred tax assets of $124.9 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset the net deferred tax asset. Pursuant to Sections 382 and 383 of the Internal Revenue Code, or IRC, annual use of the Company’s net operating loss and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company determined that such an ownership change occurred on December 29, 2006, as defined in the provisions of Section 382 of the IRC as a result of various stock issuances used to finance the Company’s operations. Such ownership change resulted in annual limitations on the utilization of tax attributes, including net operating loss carryforwards and tax credits. The Company estimates that $101.2 million of its net operating loss carryforwards were effectively eliminated under Section 382 for federal tax purposes. A portion of the remaining net operating losses limited by Section 382 become available each year. The Company also estimates that $12.2 million of its research and development credits and other tax credits were effectively eliminated under Section 383 for federal purposes. As a result of the Section 382 analysis completed during 2012, the Company has included in the deferred tax asset schedule the deferred tax assets for net operating losses of $82.7 million and tax credits of $19.9 million. The company’s Section 382 analysis was completed through December 31, 2011. There is a risk that additional changes in ownership could have occurred since that date. If a change in ownership were to have occurred, additional net operating loss and tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. The Company has not completed an analysis of uncertain tax positions related to the net operating losses and credits recorded as deferred tax assets. If such analysis is performed at a later date and an uncertain tax position is identified, the related deferred tax asset would be reduced along with a corresponding reduction in the valuation allowance.

The Company’s practice is to recognize interest and/or penalties related to uncertain tax positions and income tax matters as income tax expense. The Company had no accrual for interest or penalties on its balance sheets at December 31, 2014 and 2013, and has not recognized interest and/or penalties in its statement of operations for any of the years ended December 31, 2014, 2013 or 2012.

The Company is subject to taxation in the United States and California. The Company’s tax years for 1997 and forward are subject to examination by the United States and California tax authorities due to the carryforward of unutilized net operating losses and R&D credits.

Significant components of the Company’s deferred tax assets as of December 31, 2014 and 2013 are listed below. A valuation allowance of $124.9 million and $119.8 million at December 31, 2014 and 2013, respectively, has been recognized to offset the net deferred tax assets as realization of such assets is uncertain. Amounts for the years ended December 31 were as follows (in thousands):


Deferred Tax Assets	2014			2013
Net operating losses	$	85,510		$	82,753
Credit carryovers		19,903			19,903
Depreciation and amortization		14,922			12,915
Accruals and reserves		808			322
Capital loss carryover		100			100
Other		3,660			3,808

Total deferred tax assets		124,903			119,801
Less valuation allowance		(124,903	)		(119,801	)

Net deferred tax assets	$	—		$	—

The reconciliation between the provision for income taxes and income taxes computed using the U.S. federal statutory corporate tax rate were as follows for the years ended December 31 (in thousands):


	2014			2013			2012
Computed “expected” tax benefit	$	(5,607	)	$	(10,621	)	$	(7,712	)
State income taxes, net of federal benefit		(444	)		(1,947	)		451
Tax effect of:
Change in valuation allowance		5,102			13,074			(37,179	)
Expiration of prior year credits and net operating losses		675			(237	)		45,382
Research and development and other tax credits carryovers		—			(672	)		(1,097	)
Stock compensation		274			337			358
Other		—			66			(203	)

Provision for income taxes	$	—		$	—		$	—

As of December 31, 2014 and 2013, the Company had available federal net operating loss carryforwards of approximately $307.3 million and $300.8 million, respectively, which expire from 2018 through 2034. In addition, the Company had federal research and development credit and orphan drug credit carryforwards of $26.3 million and $26.3 million as of December 31, 2014 and 2013, respectively, to reduce future federal income taxes, if any. These carryforwards expire from 2018 through 2033 and are subject to review and possible adjustment by the Internal Revenue Service. The Company also has available California state net operating loss carryforwards of approximately $275.0 million and $282.1 million as of December 31, 2014 and 2013, respectively, which expire from 2015 to 2034. In addition, the Company had California research and development credits of approximately $8.8 million as of December 31, 2014 and 2013, respectively, to reduce future California income tax, if any. The California research and development credits do not expire.

The Company generated windfall tax benefits from the settlement of certain stock awards. The tax benefit will be recorded as a credit to additional paid-in capital in the year the deduction reduces income taxes payable. The net operating loss carryforwards related to these windfall tax benefits of approximately $1.6 million are included in the net operating loss carryforwards disclosed above.